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6. (Equity Valuation Cash Flows] Following are financial statements (historical and forecasted) for the Global Products Corporation. GLOBAL PRODUCTS CORPORATION BALANCE SHEETS 2016 FORECAST 2017 Cash $ 50,000 $ 60,000 Accounts receivable 200,000 290,000 Inventories 450,000 570,000 Total current assets 700,000 920,000 Fixed assets, net 300,000 380,000 Total assets $1,000,000 $1,300,000 Accounts payable 140,000 180,000 Accruals 50,000 70,000 Bank loan 80,000 90,000 co Total current liabilities 270,000 340,000 Long-term debt 400,000 550,000 Common stock ($1 par value) 50,000 50,000 Capital surplus 200,000 200,000 Retained earnings 80,000 160,000 Total liabilities and equity $1.000.000 $1,300,000 INCOME STATEMENTS FORECAST 2017 Net sales Cost of goods sold Gross profit Marketing General and administrative Depreciation Earnings before interest and taxes Interest Earnings before taxes Income taxes (40% rate) Net income $1,300,000 780,000 520,000 130,000 150,000 40,000 200,000 45,000 155,000 62,000 $ 93,000 $1,600,000 960,000 640,000 160,000 150,000 55,000 275,000 55,000 220,000 88,000 $ 132,000 A. Assume that the cash account includes only required cash. Determine the dollar amount of equity valuation cash flow for 2017. B. Now assume that Global Products' required cash is set at 3 percent of sales. Any additional cash would be surplus cash. Re-estimate the dollar amount of equity valuation cash flow for 2017. Chapter 10: Valuing Early-Stage Ventures 385 C. Let's assume that iny e assume that investors in Global Products want to estimate the venture's present value at the end of 16 Forecasted financial statements reflect the stepping-stone year. Cash flows are expected to grow at a petual 8 percent annual rate beginning in 2018. Assume that all cash is required cash as was done in Part A. What is Global Products present value if investors want an annual rate of return of 25 percent? Work with the assumptions in Part B about Global Products' required cash being 3 percent of sales. Calculate the present value of the Global Products venture at the end of 2016 if investors want an annual rate of return of 25 percent and cash flows are expected to grow at a perpetual 8 percent annual rate beginning in 2018. Return to the discussion of the FrothySlope venture at the beginning of the chapter. Formulate an answer for each of the five questions that are posed under the heading "What Is a Venture Worth? SPREADSHEET VALUATION PROBLEM 8 Venture Present Value Calculations The Biometrix Corporation has been in operation for one full year (2016). Financial statements follow. Biometrix's management is interested in determining the value of the venture as of the end of 2016. Sales are expected to grow at a 20 percent annual rate for each of the next three years (2017, 2018, and 2019) before settling down to a long-run growth rate of 7 percent annually. The cost of goods sold is expected to vary with sales. Operating expenses are expected to grow at 75 percent of the sales growth rate (i.e., be semi-fixed) for the next three years before again growing at the same rate as sales beginning in 2020. Individual asset accounts are expected to grow at the same rate as sales. Depreciation can be forecasted either as a percentage of sales or as a percentage of net fixed assets (because net fixed assets are expected to grow at the same rate as sales growth). Accounts payable and accrued liabilities are also expected to grow with sales. Biometrix's management is interested in determining the equity value of the venture as of the end of 2016. Because Biometrix is in its startup life cycle stage, management and venture investors believe that 40 percent is an appropriate discount rate until the firm reaches its long-run or perpetuity growth rate. At that time it will have survived and will become a more typical firm with an estimated cost of equity capital of 20 percent. One million shares of common stock are outstanding. A. Project the financial statements for the next four years (2017-2020). B. Calculate the valuation cash flow for each year. C. Determine Biometrix's equity value at the end of 2016